Citi

It was not your typical holiday trading session overnight, as the reflation trade continued to find legs. Despite much of East Asia absent on account of Lunar New Year, we’ve seen US equity futures and oil prices continue to move higher.

CitiFX Strategy observes that reflation trades continue to drift higher with US yields, copper, oil and many global equity indices all pushing to new post-COVID highs. We see further room to run in these, as another substantial US fiscal package, further vaccine rollouts and plans for re-openings, and a declining US Treasury General Account balance are coming through. Positioning signals seem somewhat mixed, particularly in equities, but not stretched in short rates positions and certainly not in short USD. Profit-taking and retracements are likely over time, but also seem likely to be shallow in this environment.

While it may be a holiday disrupted week, there are top tier events that should provide vital clues to current macro conversations. North America out on Monday and Lunar New Year and Carnival holidays taking place throughout. With China out for most of the week, the Asia sessions should continue to be quiet.

· However there are a few events that should provide insight. The FOMC minutes are published on Wednesday, while we see inflation prints for SEK, GBP, CAD, ZAR, PLN & ILS. It’s a big week for the AUD, with the highlight being Thursday’s employment report among other events. EUR may see headline noise from a number of sources. The Markit PMI prints on Friday will be a highlight, while we see some scope for GBP data disappointment next week as the full impact of the latest lockdown is unveiled.

· For EM countries, there are a number of focuses. We expect lively debate into Thursday’s central bank decision for TRY, though Citi Economics expects no rate change. IDR should see a 25bps rate cut, while SGD has the 2021 budget unveiling on Tuesday. Q4 GDP prints feature throughout the week.

RBC Capital Markets

Week ahead: Data wise, in the US, retail sales will be the highlight (Wed, see USD), while CApublishes CPI (Wed) and retail sales (Fri, see CAD). In AU, labour data (Thu) and retail sales are out (Fri). The Euro area and the UK publish mfg. & services PMIs on Friday (see GBP, EUR). Central bank eventsinclude FOMC meeting minutes (Wed), rate decisions in Indonesia and Turkey (Thu), and Riksbank minutes (Fri). Other releases include Germany’s ZEW survey, the second estimate for Q4 EZ GDP (Tue), UK CPI, SA CPI & retail sales (Wed), SW CPI (Thu), UK retail sales (Fri).

USD: We expect retail activity to look robust on the month, following a very weak December. Looking ahead, improving Covid trends should continue to embolden consumers. They were sitting on excess savings of ~$1.6 trillion at the end of 2020 and this is poised to grow even larger with another stimulus package in the offing.

EUR: EZ lockdown restrictions were largely unchanged in Feb. So we do not expect this week’s PMIs to show a meaningful recovery in services (RBC 44.1). As for the manufacturing PMI, the sector has been relatively little affected by social distancing restrictions and has been boosted by strong goods demand, and our economists expect the PMIs to continue showing a strong recovery in the sector. More interesting, however, will be the details, with previous releases indicating that rising shipping costs are starting to put upward pressure on producer input and output prices (for more, read here).

CAD: Our economists forecast a monthly gain of 0.1% for headline CPI in January (Wed), which would bring the YoY rate to 0.6% from 0.7% in December. A temporary factor weighing on this month’s report is Ontario’s lowering of electricity rates due to expanded lockdown restrictions, subtracting roughly 0.2pp from the headline. Our economists’ forecast profile currently expects an unwind in March assuming the lockdown is lifted. The BoC’s core measures have held in quite well during the pandemic, though they have edged lower in the last two months. We expect December retail sales (Fri) to confirm that activity fell sharply in the month alongside increased restrictions (StatsCan flash estimate:-2.6% m/m). The RBC Economics Consumer Spending Tracker suggests that declines should be pronounced in clothing and entertainment goods. Note that despite sizable declines in retail and wholesale trade in the ‘flash’ estimates, the December GDP nowcast was still earlier set by StatsCan at +0.3% m/m. Real estate and mining, oil and gas were cited as sources of growth. For January, more complete lockdowns should give a downward bias to a new retail ‘flash’ estimate, though our economists think down 1–2% m/m is reasonable.

GBP: Our economists expect UK CPI inflation to pick up noticeably in coming months, but that won’t show through in the January release. We don’t expect any great change from this month’s IHS Markit/CIPS PMI survey. Both the services and manufacturing PMIs in January were higher in the final reading than in the ‘flash’, suggesting some improvement in conditions as the month went on. However, the current lockdown means that most consumer-facing services remain shuttered, limiting any potential improvement from last month’s 39.5. For manufacturing, though the PMI dropped to a 3mlow of 54.1 last month, the sector weathered the end of the pre-end of transition period stockpiling better than expected. But with new orders at a standstill last month, the manufacturing PMI is likely to slip back slightly to 53.1 this month.

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